Chevron Is Undervalued

Chevron is undervalued -- P/E: 10. Look for Chevron's oil/natural gas production to increase more than 5% in FY2009, and then at a about a 4-4.5% annual rate through 2012. The company is also on-track to achieve its objective of $2.5 billion in cost cuts. However, CVX, like other refiners, is feeling the effects of sluggish gasoline demand, which has reduced downstream margins. It's hard for refiners to pass along higher gasoline costs amid tepid demand: take more than 7.6 million employees out of the U.S. economy via job lay-offs and the result is a difficult retail gasoline market.

Still, Chevron remains an attractive refining play, longer-term: it owns seven refineries and one asphalt plant, and has interest in 10 international refineries, for a total operable capacity of 2.14 million barrels per day, half of which is in North America.

And when the tide comes back in and the U.S. economy finally starts adding jobs on a monthly basis (hopefully by March), gasoline margins should improve, which bodes well for CVX. The First Call FY2009/FY2010 EPS estimates for CVX are $5.07 to $7.91.

Technically, Chevron's stock chart is strong -- an uptrend. The stock has fallen below the key, 50-day moving average and that is a concern, but given the stock's large rise to $81 from about $55, view that pull-back as short-term profit taking, and as a Buy opportunity.

2010 Outlook: Chevron is a long-term play, but if you're looking to sell CVX within the year, take your profits after it rises to $87-89, if it fails to clear $90.

Stock Analysis: Chevron Corp. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 25% position in CVX now; then buy another 25% in one month, if U.S. and global economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your CVX position before March 2010. Sell/Stop Loss if you were to buy shares in this company: $47.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.